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Last week a big story broke in the cheerleading world about sexual misconduct in the sport by coaches and officials towards children and teenagers. I’m going to discuss why the handling of this misconduct is, as surprising as it might sound, a story of monopoly power.
Plus I’ll do quick updates on the new antitrust laws to deal with big tech, franchising fights, the Ultimate Fighting Championships monopoly case, Amazon, and Qualcomm. I’ll also note a monopoly in the educational market, an app store called Clever that has control of how school districts in America buy software.
Cheerleading and Sexual Abuse
When I started writing this newsletter on monopoly power, I would not have predicted that one of the more interesting and popular themes would be on how market power plays out in the world of cheerleading. And yet, the story of monopolization in cheer is a great example of the problem of concentrated corporate power, because it reveals so much about how our economy actually works.
As a quick recap, the company involved is called Varsity Brands, which has monopolized the sport of cheerleading by buying up most major competitions. Varsity is owned by private equity giant Bain Capital. What makes this story so useful is that there are no fancy high tech gadgets in cheer, no possible excuses from economists; it’s just the use of raw power to extract money from teenagers and their families through a business conspiracy.
The story also speaks to the power of advocates to make change. Over the past six months, competitors and customers have filed multiple class action antitrust lawsuits against Varsity, all essentially alleging the same anti-competitive practices from different angles. These cases hit one after another, building on each other and adding more details to the overall story of recklessness that occurs under a monopoly.
And now another shoe just dropped.
Last week, Marisa Kwiatkowski and Tricia L. Nadolny at USA Today detailed a massive scandal of rampant sexual abuse in cheerleading. There’s a high-profile aspect of this scandal; Netflix’s Cheer celebrity Jerry Harris was arrested for producing child pornography involving young cheerleaders, with complaints about him seemingly ignored by the main cheer governing body. But the scandal is more far-reaching than just Harris. What Kwiatkowski and Nadolny found was that over a 100 convicted sex offenders who had raped or assaulted children or otherwise engaged in sexual misconduct were allowed to work in the cheerleading world, and the two governing nonprofits of the sport – USA Cheer and the U.S. All Star Federation (USASF) – did not put these sex offenders on their list of people banned from the sport.
This kind of abusive behavior happens in every sphere of human activity, so one might think that abuse is not intrinsic to any particular business model. Further, these offenders by and large did not work at Varsity, but at independent gyms and associated companies doing business in the cheerleading ecosystem, so it’s even easier to see this as an isolated scandal. And yet, while it may not at first seem like it, this scandal about predators is part of the same monopoly story that I happened to hit on in January. This is a story of a theme I’ve hit on in other industries, or what is known as absentee ownership.
To understand why this abuse connects to monopoly, it helps to know a little bit about how monopolistic industries like cheerleading work. The cheerleading business is a tiered structure, with Varsity, though it owns and operates a bunch of different brands, at the top as the producer of the cheerleading sport. The ultimate customers are the 3.7 million children and teenagers in the sport, whose parents both pay to enter Varsity’s contests and buy apparel and equipment from Varsity. In between Varsity and the end customers are gyms, the ostensibly independent businesses who actually train the cheerleaders. The kids actually have choices of which gyms to attend, and there is fierce competition among gyms to showcase themselves as getting your kid onto a team that can win contests and compete at a high level.
The sport’s rules and standards are organized by the major nonprofit governing bodies – the USASF and USA Cheer. These governing bodies structures the rules for contests, and for who gets to move on to championship competitions and even international cheer contests. They handle safety standards, including certifying tens of thousands of coaches on safety, doing background checks, and maintaining an “online reporting form for abuse allegations.”
Based on the rhetoric, you’d imagine that it’s a well-run sport with a lot of care for the athletes, who are of course young and vulnerable. Independent gyms compete in contests over delivering a better and more enriching experience for kids. There are governing bodies that ensure that everyone plays by fair rules, and these rules include strong safety standards.
In reality, however, cheerleading is a dictatorship, with Varsity having control over every aspect of the industry. When it was first started, Varsity was an ordinary producer of cheerleading competitions. A few decades ago, Varsity started buying up its competitors, until by 2015 it controlled 90% of the relevant cheerleading competitions in the country. So now, if you want to compete in cheerleading, you are going to compete in contests where Varsity sets the rules and the terms for entering. Varsity can send your team to championship contests, or not. Varsity used its market power to make its cheer camps and apparel business dominant. As Jeff Webb, the founder of Varsity, put it to Chief Executive magazine in 2018, they were creating a concept and ecosystem and then “positioning ourselves to provide all the products and services that that affinity group utilized.”
The gyms, while independently owned and operated, are in fact under the control of Varsity. Being a high performer in the Varsity ecosystem is high-stakes for gym owners, as hundreds of thousands or even millions of dollars can be on line based on how they perform in the corporation’s competitions. Varsity forces gyms who sought to enter its competitions to buy Varsity apparel by giving them kickbacks based on volume purchases (as John D. Rockefeller did to railroads), and penalizes them with higher prices should they not buy enough Varsity product. Rebates came in the form of ‘Varsity Fashion Dollars’ useful only to buy Varsity product. Lawyers in one suit allege Varsity rigged the rules at cheerleading competitions, giving “extra points awarded at All-Star Competitions” to gyms using Varsity apparel.
And what of the governing bodies? This is where it gets interesting. USA Today also noted that Varsity controlled, funded, and organized the major governing bodies for cheerleading. USA Cheer, for instance, has six staffers, all of whom are Varsity employees that are contracted out from the organization. The governing bodies are also critical to Varsity’s control. Gyms, for instance, must report their entire cheerleading schedule to the USASF and buy liability insurance from it; those who compete at non-league events face higher prices, meaning that USASF is reinforcing Varsity’s monopoly.
With all this control, one would imagine that it would be easy for Varsity to put an end to abuse. Yet, when it comes to maintaining a list of sexual misconduct offenders at gyms, suddenly Varsity and its affiliated organizations become totally powerless. USASF executive Amy Clark told USA Today, “We’re a voluntary-membership organization, not a gatekeeper for participation in the sport.” But of course, Varsity and its affiliates are gatekeepers, and have even threatened teams that compete in international non-sanctioned events. It’s just that the gatekeeping seems to be oriented around maintaining market power, not stopping sexual predators from working in cheerleading.
Clark’s denial of capacity here is very hard for me to believe, because it doesn’t seem like they actually try. USA Today’s story exposed that Varsity/USASF had a list of offenders banned from the sport, however, it had just 21 people on it. Immediately after being told they were being investigated by the newspaper, they added on many more. In other words, it doesn’t seem like preventing sexual abuse in the cheer ecosystem was the guiding desire here so much as avoiding bad publicity.
More qualitatively, the cheerleading world is a small gossipy place full of open secrets and controlled, both socially and financially, by Varsity. As I did reporting on the business practices of Varsity, I constantly heard rumors and stories of very ugly currents in the cheer world. You don’t have to take my word for the tight-knit nature of the community and how angry they are at Varsity, you can just read the comments on the last story I wrote on the company. The lawyers and investigators in the antitrust cases heard the same stories, and some were even motivated to take on Varsity because of this abuse. I don’t know how much Varsity was involved here, but I suspect, at the very least, that Varsity execs were turning a blind eye to what was happening.
There are many reasons Varsity might have preferred to do little about the sexual abuse allegations. One case in Texas alleges that Varsity was protecting high-profile cheer celebrities because those celebrities were valuable recruiters for the sport. I was told that there may have been other reasons, like the possibility of blackmail or just because certain officials didn’t think any of it was a big deal. But a more likely reason is simply that, as a monopolist, Varsity, didn’t have to. There was nowhere else for cheer officials to go if they wanted to raise the issue, because Varsity could retaliate against them by having them exiled from the sport. Being able to crush someone’s livelihood is power.
Moreover, Varsity had constructed a legal structure such that its lawyers probably assumed that it wasn’t legally liable for anything that went on. In 2017, in reaction to the USA gymnastics sexual abuse scandal, Congress passed the Protecting Young Victims from Sexual Abuse and Safe Sport Authorization Act, which expands criminal and civil charges on adults who don’t report suspected abuse. Yet, under this law, it’s likely that they assumed liability was held by individual gyms, or possibly governing bodies like the USASF and USA Cheer, who are ostensibly independent. Such neglect is a phenomenon common to monopolists, what I noted above as ‘absentee ownership,’ or control without responsibility, similar to Google’s or Facebook’s sales of ads by counterfeiters, or Amazon’s sales of counterfeit or dangerous products, protected by laws and rules that immunize them from liability. It’s not that these corporations are seeking to enable illegal behavior, but that behavior is a side effect of their market power.
And here’s the connection to monopoly. As any economist who studies monopolies can tell you, unchecked market power gives a producer the ability to raise prices, which Varsity did, as well as to reduce the quality of the end product. Often quality reductions happen in a number of ways, like through less innovation, or smaller packaging sizes, or worse quality ingredients. But it can also happen by eroding safety standards, which in this case, is what Varsity was doing.
Varsity, through its control of both the contests and the governing bodies, had control over the sport, including ostensibly independent gyms, and used that control to maximize its market power and profits. Anything unrelated to that goal, including safety for athletes, just wasn’t a priority. Many non-Varsity actors, including other cheer officials and parents, wanted to do something about sexual abuse. But governing bodies were both unwilling to act themselves to address the problem, and they were unwilling to let others act on their behalf, because doing so would mean giving up control of a sport in which they had to maintain market power. So quality in the form of safety standards went down, regulatory or governing bodies were corrupted, and those who sought to speak out faced potential retaliation, even as children were being abused.
And that’s the overall lesson here, which goes far beyond cheerleading. Monopolists in every area of our economy structure markets in ways that foster and encourage destructive behavior, while making it hard for those affected to raise legitimate problems to prevent their recurrence or to seek redress. And that is why anti-monopoly rules and liberty have always been tightly linked in America, and why the erosion of one means the erosion of the other.
Franchising and Restaurants Battle Back: I’ve written about fights between franchisees and franchisors of late, including 7-Eleven, Subway, and McDonald’s. Now there are calls for the reform of franchising laws, including at the Federal Trade Commission, which is revamping its ‘franchise rule’ requiring disclosure documents from franchisors. Commissioner Rohit Chopra was on CNBC talking about the need to address the problem of aggressive franchisors taking advantage of the owners of franchises.
Meanwhile, California is the latest to put a stop to predatory practices by food delivery app middlemen, forcing Grubhub, Uber Eats, DoorDash, and Postmates to get permission from restaurants before listing them.
Ultimate Fighting Championship Update: The judge in the monopoly case against the UFC said he is likely to let the fighters actually sue for lost wages by letting them band together as a ‘class’ so that it’s affordable to actually sue the league. This suit is similar to some of the suits against cheerleading giant Varsity; those are also class action suits of lots of individuals and small businesses banding together against one large corporation for damages.
Class certification is a critical issue in private monopolization cases. It costs millions of dollars to bring a suit against a corporation. If ten thousand people each have been cheated out of, say, ten thousand dollars, that’s an aggregate loss of $100 million. If you have to sue as just one individual, it’s not worth the cost; no one will put a few million dollars into a case to get back a ten thousand dollar loss. But if a group can band together, then a lawsuit makes sense.
The converse is also true. If people aren’t allowed to band together and sue, then it makes sense for a monopolist to try and cheat a lot of people out of a little bit of money apiece. One of the key achievements of the conservative legal movement is to make it harder and harder for people to band together to sue corporations. That’s why telecom companies sometimes slap small sleazy fees on your bill – they know you can’t fight back.
At any rate, the UFC case has been going since 2014, and now it can continue. I wish it were a faster process, but this is nonetheless a good decision.
Amazon Chronic Returners: Amazon is banning consumers who return too many items. I don’t know how I feel about the underlying practice, but it is certainly dangerous to be banned by Amazon if Amazon is one of the only ways to buy a lot of online items. It’s just one more warning that market power changes the nature of certain problems.
Qualcomm Monopoly: The Federal Trade Commission just voted 3-2 to appeal a monopolization case against Qualcomm in the ninth circuit. I’m surprised and pleased, because it’s rare for the Chair of the FTC, Joe Simons, to take on market power. And this appeal is necessary, because the appeals court effectively legalized monopolization.
In the original case, the FTC alleged that Qualcomm was forcing buyers of its essential cellular communication chips to pay them a fee even when they used a competitor’s chips. This arrangement was somewhat like Standard Oil’s deals with railroads that they got a kickback when a railroad shipped a competitor’s oil, or Bill Gates’s requirement that computer makers pay a license for Windows even when they used a rival operating system. It is effectively a tax on one’s rivals. The FTC won at a district court, and then Qualcomm won at an appeals court in a somewhat insane decision that revealed that the judiciary is out of control and increasingly untethered to what the law actually says. Now the FTC is asking for an appeal, with two Republicans – Christine Wilson and Noah Phillips – dissenting.
That’s good. We need some fight in our agencies. Thanks Joe Simons for doing the right thing.
Clever: A Software School Monopoly, or Why Everyone Wants an App Store: I’ve been told about a particular monopoly in the educational market and I’m wondering what you think. It’s called Clever, and here’s an email I got from someone who sells educational software.
Clever makes software that makes it easy for students and teachers to log in to any app used by the school with a single login, and also passes to apps necessary information about who is in what class (rostering). Clever gives its service to the district absolutely free, which of course is very attractive to the districts. The problem is that Clever, which is now in like 60% of the nation’s schools, then is able to extort a very high fee from any educational software vendor that wishes to continue serving the district. Just to give you an example, we recently signed a contract with XYZ Public Schools for the 2020-2021 school year for $18,000. XXYZ now wants us to use Clever for rostering and sign on — Clever has a minimum price to do this of $10,800. If we don’t pay this fee to Clever (thus losing our ability to properly serve XYZ’s teachers and students), our chances of continuing our relationship in the future is in serious jeopardy…
This situation is stifling innovation in education software, forcing out smaller companies like us in favor of the giant educational publishers who make blanket deals for tens of millions of dollars — so that they will once again become close to the only options available to a majority of our nation’s teachers and students. It will radically limit options, ideas, inflate prices and inhibit free trade and innovation in education.
Clever was started by Silicon Valley entrepreneurs backed by large venture capital firms (including Google ventures), so this group understands how to wield market power. Clever sounds to me like a utility-style service, providing a useful function to schools by doing so through a corrupt pay-to-play business model. And without any sort of public regulatory schema, Clever can exploit market power through a payola style arrangement against third parties. Clever is basically charging software companies rent for being able to sell to schools, serving one set of stakeholders by harming a different one. I’m still trying to think through this business model, so if you have experience with Clever, let me know.
Thanks for reading. Send me tips, stories I’ve missed, or comment by clicking on the title of this newsletter. And if you liked this issue of BIG, you can sign up here for more issues of BIG, a newsletter on how to restore fair commerce, innovation and democracy. If you really liked it, read my book, Goliath: The 100-Year War Between Monopoly Power and Democracy.
P.S. One of my favorite organizations is the Institute for Local Self-Reliance. I use their research all the time. They are looking for a Senior Policy Advocate, so if you’re interested, here’s some information on how to apply.
P.P.S. I got this email response on Asian supermarkets, and I thought it was interesting.
Your reader’s discussion of Asian supermarket chains is interesting but it fails to touch upon an important point in my opinion.
The mainstream grocery industry has no growth and suffers from disinflationary pressure in most markets we follow.
The US market may be a little better. Kroger, for instance, had a pre-COVID target of 2.25% growth for same-store sales, which is fine but nothing to write home about.
The management of companies in industries that go ex-growth usually resort to consolidation as a strategic option to reach their required profitability targets.
Even with this consolidation taking place, the ROIC for Kroger is 6.21% and 7.5% for Albertsons. These are not the type of returns that will attract many new entrants.
Conversely, the Asian and Hispanic grocery specialty chains are seeing more top-line growth and this usually attracts competition.